Corporation Vs. LLC: What Differences?
Incorporating your business often comes as one of the most confusing decisions to make, especially when it is about choosing between a corporation or an LLC as your business structure.
You often hear people recommending an LLC business form because it’s a simpler structure, or a corporation because it provides more advantages. But how can you tell the exact difference between a corporation and an LLC, in order to make your decision confidently?
In this article, we believe that the right strategy to make the distinction between the two is to compare a limited liability company to an S corporation, since these business forms can have a common tax plan.
Social Security Tax
Among the aspects that make an S corporation better than a limited liability company is the absence of social security taxes on the businessowners’ profits, specifically for large S corporations. As for the small ones, the Social Security tax can cut a significant amount from the business owner’s profits.
Besides the Social Security tax, an LLC is proven to outdo S corporations in terms of taxation. While the money borrowed for the company in an LLC can reduce the taxes by increasing the tax base, it is unfortunately not the case in S corporations. Furthermore, the property contributed by any owner to create the LLC is tax-free, whereas a corporation only allows so for contributions provided by owners who hold the most control over the corporation.
Profits and Losses
There are other cases where an LLC business form seems to be more advantageous. An LLC, for instance, can benefit from allocations of profits and losses between its members. However, for an S corporation, the allocations of profits and losses are only accorded based on the percentage through a single class of ownership only.
A corporation can easily raise money by selling stocks or going public. But for an LLC, it is mostly not as easy to sell membership interests. This puts the corporate form ahead regarding increasing capital.
A corporation is known to protect the shareholder’s personal assets no matter the financial situation of the business. Nevertheless, it cannot protect their dividends from creditors. Conversely, it is impossible for creditors to take away the members’ parts of an LLC distributions.
Corporations are one of the most regulated business forms. Thus, they certainly come second compared to the management flexibility in an LLC. Since the latter is not as regulated, it is often preferred by business owners thanks to its diverse management options.
An LLC can be owned by foreign individuals or corporations to an unlimited number, while the number of members in a corporation cannot surpass a hundred, and they can’t be foreign.
From retirement plans to employee stock ownership, an S corporation allows its employees to take advantage of a wide range of fringe benefits more than any other business structure. These benefits are only taxed for employees, sole proprietors, or owners of over 2%. As for a C corporation, neither stockholders nor employees must pay taxes on fringe benefits.